Batam Special Economic Zone

Recent initiatives by the Indonesian and Singapore governments suggest that Batam's surge of development over the past 25 years is just the beginning!

Indonesia first designated Batam and the nearby islands of Rempang and Galang as a Special Development Zone in the 1980s (the three islands have since been linked by bridges and together are known by the nickname ‘Barelang').

The Development Zone designation spurred a first wave of rapid development presided over by B. J. Habibie as the head of a specially created Batam Industrial Development Authority (Habibie was later to briefly succeed General Soeharto as Indonesia's President).

Over the following decade, Singaporean, Malaysian, Japanese, Korean, Taiwanese, European, Australian and American companies as well as Indonesian corporations rapidly established presences on the island.

Growth Triangle

By the early 1990s, Indonesia had entered into an understanding with the governments of Singapore and Malaysia to create the SIJORI Growth Triangle, which purportedly aimed at combining the competitive strengths of Singapore, Johor (in Malaysia) and the Riau Islands to make the subregion more attractive to regional and international investors.

What it was really about was linking the infrastructure, capital and expertise of Singapore with the abundance of land and low-cost labor resources of Johor and Riau (especially Batam and the nearby island of Bintan).

Singapore recognized that it needed to relocate some of its land and labor-intensive industries (and its "dirty" heavy industries). Johor and Riau were the logical locations.

The Asian economic crisis of the late 90s hit Indonesia particularly hard and issues also emerged between Singapore and Malaysia. For a time, the rise of Batam slowed and the earlier Growth Triangle ideas were pushed to the backburner.

The slowdown continued throughout the political upheaval of Indonesia's remarkable, though at times stumbling, transition to a new democratic constitution and government structure to succeed the authoritarian Soeharto and his New Order regime. Batam also found itself facing increasing competition for investment dollars from China, Vietnam, India and Malaysia. Pressure began to build on the National government and legislature to match investment incentives being offered by other locations in the region.

President Susilo Bambang Yudhoyono's election as Indonesia's first directly elected president and the ascension Lee Hsien Loong as the new Prime Minister of Singapore sparked initiatives to get Batam back on track.

In June 2006, Yudhoyono made a symbolic journey to Batam to meet Lee and together they witnessed the signing of a new Framework Agreement on Economic Cooperation between Singapore, Batam and the two other immediately neighboring Indonesian islands of Bintan and Karimun (this time, Malaysia was not included).

Special Economic Zone

This Agreement cemented a Singapore-Indonesia partnership to establish a Special Economic Zone (SEZ) covering Batam, Bintan and Karimun with streamlined procedures and incentives to make the islands more investor-friendly, cost-competitive and more capable of attracting increasing Singaporean and other international direct investments.

It identifies seven key areas in which Indonesia and Singapore will pool resources to ensure that business, regulatory and labor conditions are favorable to investors - investment, finance and banking, taxation, customs and excise, immigration, manpower and capability development.

The new Agreement implicitly recognizes once more the reality that tiny Singapore is running out of land and facing rising costs for the key inputs that historically have contributed to its prosperity.

Throughout the fallout years following the economic crisis, Singaporean entrepreneurs continued to look enviously at the strategic location, cheap land and labor, low building costs and other advantages offered by Batam, and increasingly are moving or expanding their operations to its burgeoning industrial estates.

As of 2004, Singapore already ranked as Batam's largest source of foreign investors with some 280 companies established on the island and direct investments reportedly totaling some US$453 million. As Singapore continues to prosper, more Singapore capital is bound to overflow into Batam.

Free Trade Zone

As a further incentive, in 2007 the Indonesian Government formally decreed the designation of Batam, Bintan and Karimun as fully fledged Free Trade Zone (FTZ), which will bring the abolition of customs duties, value-added taxes, luxury goods taxes and excise duties.

A presidential regulation establishing a National Council to oversee the FTZ was promulgated in May 2008 together with decrees appointing FTZ councils to implement and administer new taxation, immigration and other arrangements. The initiatives bring with them less obvious benefits. For example, many Batam industries operated by or supplying Singapore manufacturers have become de facto beneficiaries of the Singapore-U.S. Free Trade Agreement because of their direct Singaporean commercial ties.

The process of implementing the SEZ and FTZ changes is moving slowly but the announcements of what is coming have already prompted more new investment and spurred activity in property markets and the commercial sector.

The promised measures should be in place by early 2009, mainly because of the national elections due in April - no politician currently holding office will want to face the voters with a record of failure or prolonged delay on such an important regional issue.

Batam's rapid and consistent economic and population growth, its already strong and diverse industrial base plus the current commitments to growth and development from both the Indonesian and Singapore Governments would appear to ensure the island's future.